Canadian IRA is known as `RRSP,' and it has some variations

The big middle-class tax break in Canada is called RRSP. RRSP stands for registered retirement savings plan, and it is similar to the individual retirement account (IRA) in the United States, but with some important variations. For many people, especially those in the salaried middle class, the RRSP is the only form of tax savings open to them, as well as a way to build up a private pension fund for retirement.

The plans are far and away the most popular tax shelters in Canada. For the 1984 tax year Canadians are expected to put more than $4 billion into RRSPs.

The federal government in Ottawa thinks it is such a good idea that it has proposed changing the rules regarding RRSPs, allowing people to save more and deduct more from income taxes. Some critics say Canadians save too much anyway -- about twice as much as Americans -- and it would be better for the economy if the money were spent, not saved. But it is doubtful the government will respond to that criticism.

The plan works differently for salaried and self-employed people. The salaried person is allowed to contribute $3,500 (all figures are in Canadian dollars) a year to a retirement savings plan and is allowed to deduct that $3,500 from taxable income. The first catch, though, is that if the taxpayer has a pension plan at work -- and most do -- the amount the taxpayer puts into the pension plan must be deducted from the $3,500. So if weekly deductions to the company pension plan add up to $2,000 a year, the taxpayer can put only $1,500 in the RRSP.

After making the contribution to the RRSP, the taxpayer is given a slip of paper from the bank or trust company involved, and that is filed with the income tax return. If the taxpayer were in the 50 percent tax bracket, the $1,500 contribution would mean a tax refund of $750. This gets more attractive as the contribution gets larger.

The second catch is that if the money is taken out before retirement, it becomes taxable in that year.

The retirement fund can be used to buy an annuity. The taxpayer is allowed to start doing that at age 60 and must do it by age 71.

Here are some recent examples of what a Canadian taxpayer would get from his RRSP at retirement. These are only estimates, though, because annuity payments fluctuate with interest rates. At age 60, a $50,000 RRSP would buy a man $533.75 a month for life and a woman $491.68. The different figures are determined by actuaries, who expect women to live longer -- and collect longer -- than men.

For self-employed people, the RRSP is often the only pension they will get, apart from monthly checks from Old Age Security, which everyone in Canada gets after his or her 65th birthday. The self-employed person can contribute up to $5,500 a year.

Banks and trust companies have just finished their RRSP sales blitz. Taxpayers have all year to contribute and could have made contributions for the 1984 tax year right up until Feb. 28 of this year. But because most people wait until the last minute, the financial institutions cover the market with ads for the first two months of the year.

The experts, however, say it is poor financial planning to wait until the last minute to buy an RRSP, because the money could be earning interest if contributed earlier. Putting in $5,500 a year on Jan. 1 instead of Feb. 28 of the following year would mean an extra $180,000 in the plan after 30 years, assuming an interest rate of 12 percent.

People investing in RRSPs can buy various types of plans, some with more risk but higher return, others safe and secure. There are mortgage funds, plans based on the stock market, and those that give a straight bank savings rate. No matter what the plan, the money it earns is all sheltered from the tax collector. It is only when the money is withdrawn that is taxed.

Taxpayers are also allowed to use a self-administered RRSP run by a stockbroker. The plan can invest in stocks and bonds, even options. The stocks and bonds must be issued by Canadian companies and governments, although a small amount can be foreign holdings.

The latest wrinkle is giving yourself a mortgage. The government now allows people to finance their own mortgages from their RRSP. The mortgage rate must be what is currently charged, so that the plan holder does not hand out bargain rates on his own mortgage. This plan is expensive to set up, however, is not widely popular.

The new Conservative government in Ottawa is going to increase the amount that self-employed taxpayers are allowed to put into an RRSP. There will be a gradual rise over several years, until the limit will be as high as $15,000 a year.